Electricity Pricing. Lectures 3 4, autumn 2014 Mikael Amelin

Transcription

1 Electricity Pricing Lectures 3 4, autumn 2014 Mikael Amelin 1

2 Course objective Perform rough estimations of electricity prices as well as analyse factors that have a large importance for the electricity pricing, and to indicate how these factors affect for example producers and consumers. 2

3 Ideal Pricing What price would we have in an ideal market? Assume a set, G, of producers, where each producer has to decide their production, G g. Assume a set, C, of consumers, where each consumer has to decide their consumption, D c. Ignore transaction costs. 3

4 Price-taking producer A price-taking producer has such a small market share that the market price,, is not affected by the choice of production level, G g. The profit is equal to PS g = G g C Gg (G g ), where PS = producer s surplus, C Gg (G g )=cost to produce G g. 4

5 Price-taking producer Which production level maximises profits? Study the marginal cost curve, i.e., the variable costs MC Gg (G g ) = dc Gg G g dg g MC Gg (G g ) G g Choose G g so that MC Gg (G g ) =. 5

6 Price-taking Consumer A price-taking consumer has such a small market share that the market price,, is not affected by the choice of consumption level, D c. The profit is equal to CS c = B Dc (D c ) D c, where CS = consumer s surplus, B Dc (D c )=benefit of consuming D c. 6

7 Price-taking Consumer Which consumption level maximises profits? MB Dc (D c ) Study the marginal benefit curve, i.e., the willingness to pay MB Dc (D c ) = db Dc D c dd c D c Choose D c so that MB Dc (D c ) =. 7

8 Benefit to the society Producers will increase their production until the marginal production cost is equal to the market price. Consumers will increase their consumption until the marginal benefit is equal to the market price. Is this behaviour beneficial to the society? Study the total surplus. 8

9 Total surplus Definition: The total surplus, TS, is given by TS = CS c + PS g = = C G B Dc D c C Gg G g. Notice! The total surplus is not a perfect measure of the benefit to the society, as it presumes that all benefits and costs can be assigned a monetary value! C G 9

10 Total surplus Combine all marginal benefit functions into a demand curve, MB. Combine all marginal cost functions into a supply curve, MC. The total surplus is maximised if price CS PS MC MB MB = MC =. quantity 10

11 Market price In an ideal market (perfect competition, perfect information, etc.) there will be a market price which maximises both the total surplus and the surplus of all producers and consumers. The market price is set by the intersection of the supply curve and the demand curve, i.e., marginal production costs and willingness to pay. 11

12 Simple Price Model Assume Perfect competition Perfect information No capacity limitations No transmission limitations No reservoir limitations Price insensitive load Mean electricity price can be estimated by studying the supply curve on an annual basis. 12

13 Example 3.1 Problem Load 75 TWh/yr. Coal condensing 30 TWh/yr., SEK/MWh Hydro power 60 TWh/yr., SEK/MWh 13

14 Example 3.1 Solution SEK/MWh 200 D = 170 SEK/MWh TWh/year G tot 14

15 Exercise 3.6 (textbook) Problem 15

16 Exercise 3.6 (textbook) Solution Total consumption in the Nordic countries: (net export) = 386. Assume that all hydro wind nuclear and industrial backpressure is utilised Total production 335 TWh, which is not enough. Assume a price between 100 and 120 SEK/MWh: Utilised 42 = 51 Total CHP Necessary 16

17 Exercise 3.6 (textbook) Solution Assume a price between 120 and 140 SEK/MWh: CHP SEK/MWh = 51 Coal condensing Hint: Check that the resulting electricity price is within the assumed range! 17

18 Example 3.3 Problem Load: - 1 January - 30 June: 35 TWh - 1 July - 31 December: 40 TWh Coal condensing 30 TWh/yr, SEK/MWh Reservoir contents: - 1 January: 0 TWh (empty) - 1 July: 18 TWh (full) - 31 December: 0 TWh (empty) Inflow: - 1 January - 30 June: 50 TWh - 1 July - 31 December: 10 TWh 18

19 Example 3.3 Solution First six months: - Hydro potential: 32 TWh. Fully utilised > 60 SEK/MWh. - Coal condensing potential: 15 TWh. 20% utilised = 164 SEK/MWh. Last six months: - Hydro potential: 28 TWh. Fully utilised > 60 SEK/MWh. - Coal condensing potential: 15 TWh. 80% utilised = 176 SEK/MWh. 19

20 Example 3.4 Problem Same system as in Example 3.1, but the inflow forecast for the next 12 months varies as follows: TWh/year Q time of the year week 20

21 Example 3.4 Solution Week 1: Same as in example 3.1 = 170 SEK/MWh Week 26: - Hydro potential: 69 TWh. Fully utilised > 60 SEK/MWh. - Coal condensing potential: 30 TWh. 20% utilised = 164 SEK/MWh. Week 52: - Hydro potential: 57 TWh. Fully utilised > 60 SEK/MWh. - Coal condensing potential: 30 TWh. 60% utilised = 172 SEK/MWh. 21

22 Example 3.4 Solution SEK/MWh week tine of the year 22

23 Nord Pool Prices Seasonal variations Average electricity price [SEK/MWh] per month in Nord Pool price area Stockholm

24 Nord Pool Prices Daily variations Hourly electricity price [SEK/MWh] in Nord Pool Elspot price area Stockholm between 1/9 and 7/

25 Market Power Market power arises when a player has such a large market share that the actions of that individual player will affect the market price the player is a price setter. A price setter can increase its own profits compared to the ideal market, but this will decrease the total surplus. It is illegal to exercise market power (but it is hard to prove that a player actually is using market power). 25

26 Price-setting producer In the ideal market, the producer would choose the production level G g, where the marginal costs of the company intersects the demand curve. However, reducing the production to G g * is profitable if the lost earnings (red area) is smaller than the increased earnings (green area). MC Gg (G g ) demand curve G g * G g G g 26